The enabling legislation permits a company registered in a foreign jurisdiction (provided the laws of such jurisdiction permit the transfer and con-tinuation of companies elsewhere) to transfer its registered office to Cyprus, de-register from the jurisdiction of incorporation and obtain a certificate of continuation in Cyprus. Conversely, the legislation also permits Cyprus registered companies to transfer their registered office and continue in jurisdictions where transfers and continuations are permitted. However, in view of the competitive advantages of Cyprus as a jurisdiction, the movement is expected to be predominantly inward rather than outward.
Previously, the transfer of a company to another jurisdiction often entailed significant tax consequences, essentially deterring crossborder corporate immigration. A migrating company would often be deemed to be liquidated in its jurisdiction of incorporation, inevitably leading to taxable disclosure of its hidden reserves. The principle of freedom of establishment enshrined under the EC Treaty and more significantly, the wide interpretation given to this principle by the European Court of Justice (ECJ), have gradually changed this. The ECJ has unequivocally supported a choice of forum approach and has emphasised the principle that companies registered in one member state should be able to carry out their activities throughout the EU without being subject to the burdensome incorporation rules of the host member state.
Pending the implementation of the Fourteenth Company Law Directive which deals with the cross-border transfer of registered office of limited companies, a number of member states, including Cyprus, have adopted legislation to facilitate cross-border transfers of corporate seat.
Advantages of legislation
The advantages of this facilitative legislation are two-fold: (i) a company may ìforum shopî for the most convenient jurisdiction in which to continue its activities whether in tax, organisation, market demand or other terms; (ii) a company is permitted to effect such a move without having to endure liquidation or winding-up proceedings in its jurisdiction of incorporation. Such a transfer should produce the same effects as a cross-border merger, which in accordance with the Merger Directive, are tax-free.
Tax-free exits were already supported by ECJ case law. In the case of Hughes de Lasteyrie du Saillant, the ECJ, prompted by the referral of the French Conseil díEtat invalidated a French statute which taxed the unrealised appreciation inherent in corporate stock held by a French resident upon transfer of his tax residence from France to Belgium.
The interpretation of the ECJ reinforced the freedom of cross-border establishment: a jurisdiction of incorporation cannot impose exit taxes deterring corporate entities from making a rational decision as to the suitability of a jurisdictionís corporate and tax regime to their particular needs.
Competitive advantages of Cyprus
Cyprus has a number of advantages which place it in a unique position from which to invest, trade, restructure or hold underlying assets. At 10 percent, Cyprus can boast the lowest corporate tax rate within Europe. Its participation exemption for dividends has no minimum holding period. It does not tax capital gains other than on the disposal of immovable property situated in Cyprus or the disposal of shares representing immovable property situated in Cyprus (and then only proportionately to the property-holding shares) and specifically exempts the trading in shares, stocks or debentures from any taxation.
Cyprus does not tax outgoing dividends paid to non-resident shareholders wherever they may be situated. Moreover Cyprus has an extensive and growing network of double tax treaties many of which feature highly attractive (often nil rated) withholding tax rates from the contracting jurisdictions to Cyprus. To give a simple example, the typical Dutch Sandwich (where a Netherlands Antilles company is parent to a Dutch BV) yields a net exit tax of 8.3 percent (for a shareholding of 25 percent or more of the share capital or voting rights). If Cyprus were to replace the Netherlands Antilles in the present structure via a transfer and continuation of the Netherlands Antilles company to Cyprus the net exit tax would be zero percent.
Cyprus has also transposed the European Company Statute allowing public companies the option to convert into a Societas Europaea (SE), which is a European public limited company. The statute provides four ways to form an SE, by merger, formation of a holding company, formation of a joint subsidiary, or by conversion of a public limited company previously formed under national law. In short, companies which transfer-in to Cyprus can reap all the tax and regulatory benefits without incurring any taxation.
Transfer-in procedure
A foreign company wishing to register in Cyprus must apply to the Registrar of Companies and submit the relevant documentation which includes among other things the certificate of incorporation, a certificate of good standing and the corporate resolution authorising the transfer-in and continuation in Cyprus. If the company is carrying out a licensed activity it will also need to satisfy local licensing criteria for the relevant activity. When the relevant documents are submitted the company will be issued with a certificate of temporary continuation and will be considered a legal person for the purposes of the law. Within six months, the company must submit to the registrar proof that it has been ìderegisteredî from its transfer-out jurisdiction, following which it will be issued its permanent certificate of continuation.
Conclusion
Cyprusí unique tax and regulatory advantages have brought it to the forefront of “vehicle” jurisdictions for financing, restructuring, holding, investment and trading. In conjunction with the possibilities offered by complementary EU legislation such as the Merger Directive and the European Company Statute, the transfer of registered office legislation has, as predicted, further bolstered the popularity of the Cyprus company.
For more information on this subject including the specifics of the transfer-in process, contact Emily Yiolitis at: emily.yiolitis@harneys.com.